Shocked that companies and mutual funds would invest OPM (Other People's Money) in high-risk investments, the Shocked Investor was originally on a mission to find out if our money ended up in these dubious instruments. This blog now also discusses other financial topics, such as straddles, options, gold, natural gas, agri/food stocks, and the collapse of the US Dollar.

Thursday, July 29, 2010

James Bullard, Federal Reserve Bank of St. Louis President, said today that the U.S. is closer to a Japanese-style outcome today than at any time in recent history due to its low interest rate policy.

He said the central bank should resume purchases of Treasury securities if the economy slows and prices fall instead of keeping rates near zero.

National Post reports that the warning was a research paper released today written by Mr. Bullard.

“A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.” “The most likely possibility from where we sit today is that the recovery will continue through the fall, inflation will start to move up and this issue will all go away,” “Suppose we get another negative shock, another surprise. We have to be prepared in that event to have a plan in place to do something.”

He added that the' Fed's pledge to keep rates near near zero may prove to be detrimental: "While some people say rates near zero will accelerate inflation, such an interest rate policy may also cause a broad-based decline in prices".

“Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome,”

Mr. Bullard also added that deflation can hurt the U.S. financial system "because falling prices undermine the value of financial contracts such as mortgages".

"His comments echoed Bernanke’s research on the Great Depression indicating that declines in borrowers’ net worth can worsen a downturn".

Brazil and a few other emerging countries like are lifting the quarterly results of big global companies.

On Thursday, Santander, Telefónica, BAT (British American Tobacco), Procter & Gamble, Avon and Bunge reported that thanks to countries like Brazil they had the chance to increase profits or prevent their fall.

In the case of Avon, Brazil ended up having a central role: the company's sales rose 33% in the country, helping to offset the 6% fall in North America, reported the Wall Street Journal's website. The curious case of the Avon is the largest emerging country, China, this time did not help the company. Sales in the Asian nation plunged 32%. In Europe, sales rose 10%, but was driven by an emerging country, Russia.

Brazil has also helped Bunge (BG), but in a different way. The sale of the Brazilian fertilizer unit allowed it a sixfold profit jump, from U.S. $ 313 million in the second quarter of last year to $ 1.78 billion.

The Financial Times reported that Telefonica's profit rose more than expected. The rise of 9.4% was supported by operations outside of Spain. While sales increased by over 10% in Latin America, in Spain they fell 4.5%. The importance for Telefonica in Brazil tends to increase, now that the company alone controls mobile operator Vivo. The country will be responsible for one fifth of the revenues of the Spanish group, notes the Financial Times.

BAT, in turn, said its sales are being sustained by strong countries in the area of commodities: Brazil, South Africa, Canada, Australia and Russia.

Santander increased profist by 9% in Brazil, which relieved its global poor result, a drop of 8%.

Also on Thursday, the London Daily published a declaration of a director of Procter & Gamble, Marc Pritchard, on the Olympics in Brazil, 2014 and the Winter Games in Russia, the same year: "We definitely intend to use these events to boost our emerging markets ".

If you feeel like this stock market is frustrating as it lacks direction, you are not alone. The economy is weak (to be polite), yet more stimulus will surely be coming. That is this a source of lack of direction.

Currently we are right at resistance. INO explains where we stand in its latest video (watch video):

You may also receive technical analysis and alerts on any stock, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

Hundreds of lawsuits have been filed agaisnt BP asking for hundreds of billions of dollars in damages due to the oil spill. Although BP puts on a nice PR image, behind the scenes BP is now fighting over where the cases should be heard. BP wants Houston, texas, home of the oil industry. Those who filed the suits awant New Orleans, which is the most affected state.

"A panel of federal judges in Boise, Idaho, will hear arguments today on which city will host spill suits, including wrongful-death claims by families of workers killed in the April explosion of the Deepwater Horizon rig. Claims include losses of revenue by Gulf Coast businesses and securities claims by holders of U.S. shares in the London-based energy company. The federal government wants the cases consolidated in federal court in New Orleans, while BP said it prefers Houston.

BP faces at least 300 suits over the spill as it works to permanently plug the Macondo well 40 miles off the coast. Oil has fouled beaches and marshes in Louisiana, Mississippi, Alabama, Texas and Florida.

U.S. officials and many plaintiffs’ attorneys contend New Orleans is the best site for consolidation, noting Louisiana is the closest state to the spill site and has suffered the bulk of environmental damage.

Putting the cases in Houston, home to BP’s U.S. headquarters, would be a “cruel irony” for Louisiana victims, said Stephen Herman, a lawyer for Louisiana residents suing over the spill’s fallout, in a May court filing".

Mervyn King, Bank of England's Governor, says there may be a considerable way to go before U.K.'s rates return to normal.

“There will come a point when we will certainly need to ease off theaccelerator and return Bank Rate to more normal levels,”

“I look forward to that time because it will probably be a signal thatthere is a smoother drive ahead, with the economic outlook improving in adurable way. But I fear there is some considerable distance to travel before wecan begin to use the word ‘normal.’”

According to the Bloomberg report, Bank of England's policy makers are "starting to split on monetary policy as an economic recovery stokes concerns about inflation pressures. Andrew Sentance argues it’s time to raise the benchmark rate from a record low of 0.5 percent, David Miles says the central bank should be prepared to step up its bond "to safeguard growth if necessary". “Recent events in sovereign debt markets and in bank funding highlight the downside risks,” “Further asset purchases may be warranted at some point in the future.”

The Bank of England also said that that slack in the economy will keep a lid on prices.

King added: “And the wider economic problems around the world underline the fact that we cannot be confident that the recovery in demand, output and employment here in the U.K. will be sustained.”

Investors are well aware of how dreadful UNG is (at least the readers here!). Some hope arrived when UNL was launched late last year. Unlike UNG which focuses in one month contracts, UNL invests on the next 12 months of natural gas contracts. The losses have to do not necessarily with the price of natural gas contracts, but with the contango as every month these ETF need to sell their contracts and buy next month contracts, thereby losing sometimes more than 20% (continuously).

Perhaps this chart for their performance year-to-date might reveal the answer:

Both are dreadful, showing a loss of 23/24%.

The chart below shows the price of the front month price of natural gas itself:

You wonder what happened to the money the investors pay for these ETFs. Like leveraged ETFs, money invested disappears ... except that money does not disappears. Somebody pockets it.

Note: You may receive buy or sell alerts on these ETFs by clicking on their links: UNG, UNL.

Monday, July 26, 2010

Bloomberg reports this morning that Goldman Sachs' documents show that it "depended on banks including Citigroup Inc. and Lehman Brothers Holdings Inc. for protection against a failure of American International Group Inc. "

You might remember all the convoluted deals involving GS, AIG, and taxpayer bailout money and the claims from the big banks that they repaid the bailout money (except C). Citigroup received the biggest bailout and "was Goldman Sachs’s largest provider of credit- default swaps on AIG as of Sept. 15, 2008".

"Goldman Sachs, the most profitable securities firm in Wall Street history, has argued that it didn’t depend on the U.S. government’s $182.3 billion rescue of AIG because the investment bank had collateral and credit-default swaps to protect itself. Joshua Rosner, an analyst at research firm Graham Fisher & Co. in New York, said the list of counterparties indicates that Goldman Sachs may have had difficulty collecting on those swaps".

“Clearly Goldman’s calculation was more tied to their expectation of the political dynamics of forcing moral hazard than the fundamental realities of the financial strength of counterparties,”

‘Backdoor Bailout’

"Lawmakers, including Representative Darrell Issa, the California Republican, have called the AIG rescue a “backdoor bailout” of Goldman Sachs, as well as the other banks that got 100 percent of the money AIG owed them. The government bailout of AIG meant Goldman Sachs never had to collect on credit default swaps it bought to cover a default".

Sunday, July 25, 2010

On the lighter side. Nikki Yanofsky performed in Ottawa yesterday with the NAC orchestra. Nikki was absolutely spectacular. Fans were treated to something truly special. This 16-year old is amazingly gifted, and let's us not even talk about her finances!

The Canadian annual inflation rate fell to just 1% in June, the lowest level in eight months. Core inflation also dropped, to 1.7%.

Interest Rates

With this data, the bank of canada, which yesterday increased its interest rates by 25 basis points to 0.75%, will have very little ammunition to keep raising rates.

CP: "The main point is that the bank cannot wait until inflation erupts, but this very much argues for a very cautions, low approach to unwinding the stimulus," said Sal Guatieri, an economist at BMO Capital Markets.

Some analysts "continue to be critical of the Bank of Canada for applying the monetary brakes — or easing the accelerator, as the central bank would see it — before the economy is ready to stand on its own feet".

GDP

"Canada's gross domestic product followed up the strong 4.9 per cent advance in the last three months of 2009 with an even bigger jump forward of 6.1 per cent in the first quarter of this year.The economy has not been as bouncy recently. Output growth stalled in April, and the Bank of Canada estimated this week that growth slowed to only three per cent in the second quarter, and will slow even more in the third quarter.

The central bank also predicted Canada's economy won't return to full capacity until the end of 2011".

The press in the U.K. reports that BP was doctoring's photos fro the oil spill. How low cna this company go? How is it possible that it is still in business?

"BP admitted some of the oil spill photographs posted on its website had been altered by staff using Photoshop.

The first altered image to surface was of a BP command centre, showing three men monitoring 10 screens of underwater activity – except in the original at least three of the screens appeared to be inactive. Enter some Photoshop wizardry.Using Photoshop, the BP staffer made it appear as if all 10 screens were active (if only showing reformatted versions of another screen).

"One of BP's contract photographers used Photoshop to edit images posted on the bp.com Gulf of Mexico Response web site."Typical Photoshop uses include color correction, reducing glare and cropping. This week we learned of two images where cut-and-paste was also used in the photo-editing process. These cut-and-pasted images have been removed from the bp.com site."For the sake of transparency, the original and edited images are presented here for comparison. We have also included an image that appears cut-and-pasted, but was edited using the color saturation tool to improve the visibility of a projection screen image."Although BP is a private company, we've instructed the photographer who created the images to refrain from cutting-and-pasting in the future and to adhere to standard photo journalistic best practices."

A BP spokesperson, Scott Dean, said the photographer was showing off his Photoshop skills and there was no ill intent. Hmmm."

Pardon us, since when do photographers show off their Photoshop skills?

With regards to the European stress tests results that will be released today, the mockery continues. Bloomberg reports that the 91 banks being stress-tested were "only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity" (according to a draft European Central Bank document).

“The haircuts are applied to the trading book portfolios only, as no default assumption was considered,” according to a confidential document dated July 22 and titled “EU Stress Test Exercise: Key Messages on Methodological Issues.”

Kenneth Feinberg, Special Master for TARP Executive Compensation, popularly called the "pay czar", will cite 17 financial institutions for having made more than $1.6B in "not recommended" payments to its executives at the peak financial crisis. This according to sources quoted by the Wall Street Journal.

Mr. Feinberg's report should be released on Friday. Among the banks that he should cite are Goldman Sachs, JPMorgan Chase and Citigroup.

Feinberg has no authority to demand the return of such payments. However, he has authority to seek reimbursement by renegotiating payments deemed "inconsistent" with pay rules required by Congress, or any payments "contrary to the public interest.

"Several of the 419 institutions that received emergency funding from the federal government by the U.S. TARP program, including Goldman, JPMorgan and Citigroup, have already returned the money to the Treasury. Still others have not, including some that will be cited in the report.

Several of the 18 Spanish savings banks have failed the European stress tests performed by the European Union to assess whether the institutions could cope with a worsening economic conditions. The test results will be released today after the markets close in Europe (11AM ET). 91 banks will be included, which account for 65% of all EU banking assets.

The news was a reported by El Pais, a Spanish newspaper. The tests should show that some banks not listed on the stock exchange need an injection of capital under some scenarios, says El Pais, quoting financial sources.

Thursday, July 22, 2010

The spin media is out in full force today. The "news" now is that "Europe may already have passed its biggest stress test".

Bloomberg reports: "The euro has rallied 8 percent from a four-year low last month. Greece, Spain and Portugal have managed to sell 50 billion euros ($64 billion) of debt since May 10, when the need to save the single currency forced finance ministers to create a nearly $1 trillion rescue fund and the European Central Bank to begin buying bonds".

“The market seems to be much more convinced following the bailout that the euro zone is working and the peripheral countries will be able to finance their debt,” said Chris Kind, head of asset allocation at Frankfurt-Trust, which manages $17 billion. “This goes hand-in-hand with the appreciation of the euro against the dollar.”

The Euro has appreciated a little yes, or actually, has reversed a bit its depreciation, but how much of that has do the Euro being strong, or with the USD being weak again? The economic news coming out of the U.S. is dreadful and traders may simply know that QEII (quantitative easing round II) is coming, as evidenced by Bernanke's remarks yesterday.

Shall QEII happen, the USD will sink again. The Euro is not strong, by any means. It's a game of musical currency chairs. The question is which will be the last one to to collapse.

Wednesday, July 21, 2010

"The unemployment rate in the United States will likely to remain well above 7 percent through the end of 2012, and the duration of the current Presidential term,"

"it would take “a significant amount of time to restore the 8.5 million jobs lost in the United States in 2008 and 2009",

“the economic outlook remains unusually uncertain.”

" financial conditions, particularly the European sovereign debt crisis, had become less supportive of economic growth in recent months.”

"the economic expansion is proceeding at a moderate pace,” but with substantial help from “stimulative monetary and fiscal policies,” in the form of "easy credit from the Fed and substantial federal spending".

Got gold? Richard Russell, the investing icon, is convinced that we have been in an upward correction in an ongoing primary bear market, based on his interpretation of the 50% principle, plus my analysis of the very poor action of the “internal market” over recent weeks.

He joins the camp that because of the serious issues with the US and global economies, new stimulus measures are coming

“I envision the Dow dropping to test, and possibly violate, the 6,547 level. I don’t know whether this will take place this year, but I wouldn’t be shocked if it does. It would not surprise me if the Dow tests the 6,547 level. And if that happens, I can almost guarantee the US will have sunk into the much-feared “double-dip” recession.

“If the US begins to shrink into a double-dip recession, I expect the Obama administration to go ‘wild’ with new stimuli and ‘make-work’ programs, all of which will be financed with higher taxes and a further major expansion of the Federal Reserve balance sheet. I would also expect every central bank in the world to simultaneously open their money-printing spigots wide, wide, wide.

“Conclusion in a nutshell: the secret of the forthcoming picture lies with the action of the U.S. stock market. Again I’ll remind my subscribers that the function of the stock market is to discount the future, not to mirror the present. All news is history. Or as Wall Street puts it, “news known is news discounted”.

“One of the biggest mistakes amateurs make is to think something they know is unknown and not already discounted by the market. Despite this, the media insist on describing every move of the stock market as being a reaction to some current event or some new government statistic. They couldn’t be further off the mark. As I read it, the poor action of the current stock market is telling us that the future for the U.S. is bearish and a hard rain lies ahead.

Airbus and Boeing announced good orders at the Farnborough Airshow in Britain, but Embraer joins them by announcing the signing of two contracts to supply up to 160 aircraft in an amount estimated at up to $ 5.8 billion.

Embraer trades in new York as symbol ERJ (click to receive buy/sell alerts).

The orders makes the Company one of the most successful of the exhibition, which marked the resumption of activity of aircraft manufacturers and airlines whihd had been strongly affected by the downturn in the industry and the crises of 07/08.

The largest contract was signed with British European, or Flybe to buy 35 E175 aircraft, whose capacity is 88 passengers. There are also options to purchase another 65 aircraft and purchase rights for 40 units of the same model. The total potential contract with the low cost airline comes to 140. The deal will fluctuate between U.S. $ 1.3 billion and U.S. $ 5 billion.

The second announcement was made jointly with Air Lease Corporation (ALC), which has ordered 20 planes E190 - 15 in five as buying and purchase option. The total value was not disclosed, but considering the list price for the aircraft, it is estimated that the contract would come to $ 798M.

Tuesday, July 20, 2010

Ambrose Evans-Pritchard says today that Europe is in a deflationary vortex that won't be stopped. Governments are applying a triple shock of fiscal, monetary, and currency tightening on an already broken economy. "They are doing so in a region where industrial output is still 14% below its peak, where growth barely scraped above zero over the winter "recovery", and where youth unemployment is shockingly high:

40% in Spain

35% in Slovakia

29% in Italy

26% in Ireland.

The ECB is winding down its £50B purchase of government bonds and is draining liquidity fast

In the U.S. the Fed has allowed M3 money to contract at a 10% this year. Pritchard calls it the the Great Depression rate.

"They seem unaware that China is slowing and the US is tipping into a second leg of the Long Slump. Last week's collapse in America's ECRI leading indicator to -9.8 marks the end of the V-shaped rebound. If this means what it normally means - recession within three months - Europe must take immediate action to prevent being drawn into a deflationary vortex. Spiralling public debt precludes further Keynesian spending, so this must come from central bank stimulus. Tight fiscal policy offset by ultra-loose money is the only option for Europe, the US, and Japan".

No student of Milton Friedman is surprised by the US relapse. The Fed has allowed M3 money to contract at a 10pc pace for much of this year - the Great Depression rate. The economy has hit the wall with the usual lag. Textbook stuff. Never ignore the quantity theory of money.The US Conference Board's indicator is not yet flashing a red alert, but that is because it gives weight to "yield curve inversion", where long rates fall below short rates. This indicator is meaningless in a Japan-style bust where policy rates are zero.

"So what is the ECB doing to prevent southern Europe asphyxiating from debt-deflation, and knowing that M3 contracted in February (-0.3%), March (-0.1%), April (-0.2%) and May (-0.2%)? It is tightening, as it did in mid-2008 when the eurozone was already tanking.

Far from taking steps to offset Club Med austerity, it is winding down its €60bn (£50bn) purchase of government bonds - "sterilized" in any case to prevent net stimulus. It is draining liquidity fast. The ECB's loans to credit institutions fell from €870bn to €635bn in the two weeks to July 9.

In the meantime, the three-month Euribor has risen to an 11-month high of 0.86%.

The silly bank stress tests.

Evans-Protchard also comments on the so-called stress tests, European version. He says that tests worked in the US only because that was a banking crisis and nobody questioned whether the US Treasury could stand behind the system, or whether the US would hold together as a political entity. "In Europe, sovereign states are themselves the risk, and a dysfunctional EMU is the Achilles heel".

"... euroland solidarity goes only so far. Slovakia's new government has agreed to the EFSF but withdrawn from the Greek bail-out, refusing to uphold of the pledge of the last lot. The loss of money does not matter. The politics do matter. We see again that the eurozone is a network of democracies, each subject to its own political rhythm.

Any country may change its mind and walk away, at any time. Especially Germany".

Goldman sachs is finding itsef in trouble again. The Telegraph reports that Goldman Sachs dismisses the accusations that it is causing commodity prices to soar and is exacerbating global food crises through its commodity trading operations as "disingenuous and downright misleading".

The World Development Movement says that its activities have led to increased food prices, food riots, and poverty around the world. The WDM is a a London-based organisation and wants the public to report Goldman to the Financial Services Authority (FSA) as the biggest bank allegedly is distorting commodities markets.

"The organisers said they want to put pressure on authorities to limit the ability of banks and hedge funds to trade in commodity futures.

The move came as Armajaro, a hedge fund run by Anthony Ward, was accused of cornering the cocoa market and pushing up prices after buying £650m, or 240,000 tonnes, of cocoa beans.The campaign follows the publication of a report by the WDM called The Great Hunger Lottery: how banking speculation causes food crises, in which the lobby group accuses banks and hedge funds of "gambling on hunger." The report concludes that commodity trading is "dangerous, immoral and indefensible."

The money flowing into commodity index funds and commodity derivatives soared from $46bn in 2005 to $250bn in March 2008, according to the report. The authors claim that the flood of cash pushed up food prices across the world, particularly impacting developing countries. The high price of staple foods provoked a wave of riots in cities across the world during 2007 and 2008.

Tim Jones, who wrote the report, told The Daily Telegraph: "In the 1930s, rules were introduced to limit financial speculation in food markets but these were eroded by the banks, in particular by lobbying from Goldman. Although lots of banks and hedge funds are causing the problems, Goldman is the biggest. We estimate the bank made $1bn profit from trading on food last year."

A Goldman spokesman said the report was "horribly misleading" while the profit estimates were "ludicrously overstated." The bank cited research from international bodies that showed a range of factors have "created a backdrop for global food shortages". The bank also dismissed the claims about the bank's lobbying tactics as "disingenuous and downright misleading."

Monday, July 19, 2010

Google's parading-shifting cell phone, the Nexus One, powered by Android OS, is set to be discontinued, adccording to a WSJ report. The phone was a victim of poor marketing by Google, who insisted on selling the phone over its web store only, as well as poor customer service.

The Wall Street Journal reports: "missteps and weak demand foiled the Internet company's attempt to shake up the way wireless phones are distributed."

"Nexus One, released in January, was seen as a bold experiment by Google to sell phones directly to consumers over the Web—with or without a cellphone contract. It failed amid poor sales and complaints about customer service."

Android OS Lives

Other phones running Google's Android will live on however. Motorola's Droid X phone has run out of inventory at Verizon Wireless stores.

In May, Android accounted for 13% of U.S. smartphone users, up from 9% in February, and compared with 24.4% for Apple.

Sunday, July 18, 2010

Noriel Roubini has just said in Social Europe Journal that the global economy is headed towards a sharp slowdown this year. This will occur as the effect of the numerous stimulus packages wane. Moreover, he says that the global economy was artificially boosted by massive monetary and fiscal stimulus and financial bailouts.

He adds that the fundamental excesses that fueled the crisis, namely too much debt and leverage in the private sector. have not been addressed.

"Private-sector deleveraging has barely begun. Moreover, there is now massive re-leveraging of the public sector in advanced economies, with huge budget deficits and public-debt accumulation driven by automatic stabilizers, counter-cyclical Keynesian fiscal stimulus, and the immense costs of socializing the financial system’s losses.

At best, we face a protracted period of anemic, below-trend growth in advanced economies as deleveraging by households, financial institutions, and governments starts to feed through to consumption and investment. At the global level, the countries that spent too much – the United States, the United Kingdom, Spain, Greece, and elsewhere – now need to deleverage and are spending, consuming, and importing less.

But countries that saved too much – China, emerging Asia, Germany, and Japan – are not spending more to compensate for the fall in spending by deleveraging countries. Thus, the recovery of global aggregate demand will be weak, pushing global growth much lower.The global slowdown – already evident in second-quarter data for 2010 – will accelerate in the second half of the year. Fiscal stimulus will disappear as austerity programs take hold in most countries. Inventory adjustments, which boosted growth for a few quarters, will run their course. The effects of tax policies that stole demand from the future – such as incentives for buyers of cars and homes – will diminish as programs expire. Labor-market conditions remain weak, with little job creation and a spreading sense of malaise among consumers.

The likely scenario for advanced economies is a mediocre U-shaped recovery, even if we avoid a W-shaped double dip. In the US, annual growth was already below trend in the first half of 2010 (2.7% in the first quarter and estimated at a mediocre 2.2% in April-June). Growth is set to slow further, to 1.5% in the second half of this year and into 2011.

Whatever letter of the alphabet US economic performance ultimately resembles, what is coming will feel like a recession. Mediocre job creation and a further rise in unemployment, larger cyclical budget deficits, a fresh fall in home prices, larger losses by banks on mortgages, consumer credit, and other loans, and the risk that Congress will adopt protectionist measures against China will see to that.

In the eurozone, the outlook is worse. Growth may be close to zero by the end of this year, as fiscal austerity kicks in and stock markets fall. Sharp rises in sovereign, corporate, and interbank liquidity spreads will increase the cost of capital, and increases in risk aversion, volatility, and sovereign risk will undermine business, investor, and consumer confidence further. The weakening of the euro will help Europe’s external balance, but the benefits will be more than offset by the damage to export and growth prospects in the US, China, and emerging Asia.Even China is showing signs of a slowdown, owing to the government’s attempts to control economic overheating. The slowdown in advanced economies, together with a weaker euro, will further dent Chinese growth, bringing its 11%-plus growth rate towards 7% by the end of this year. This is bad news for export growth in the rest of Asia and among commodity–rich countries, which increasingly rely on Chinese imports.

An important victim will be Japan, where anemic real income growth is depressing domestic demand and exports to China sustain what little growth there is. Japan also suffers from low potential growth, owing to a lack of structural reforms and weak and ineffective governments (four prime ministers in four years), a large stock of public debt, unfavorable demographic trends, and a strong yen that gets stronger during bouts of global risk aversion.

A scenario in which US growth slumps to 1.5%, the eurozone and Japan stagnate, and China’s growth slows below 8% may not imply a global contraction, but, as in the US, it will feel like one. And any additional shock could tip this unstable global economy back into full-fledged recession.The potential sources of such a shock are legion. The eurozone’s sovereign-risk problems could worsen, leading to another round of asset-price corrections, global risk aversion, volatility, and financial contagion. A vicious cycle of asset-price correction and weaker growth, together with downside surprises that are not currently priced by markets, could lead to further asset-price declines and even weaker growth – a dynamic that drove the global economy into recession in the first place.

And one cannot exclude the possibility of an Israeli military strike on Iran in the next 12 months. If that happens, oil prices could rapidly spike and, as in the summer of 2008, trigger a global recession.

Finally, policymakers are running out of tools. Additional monetary quantitative easing will make little difference, there is little room for further fiscal stimulus in most advanced economies, and the ability to bail out financial institutions that are too big to fail – but also too big to be saved – will be sharply constrained.

So, as the optimists’ delusional hopes for a rapid V-shaped recovery evaporate, the advanced world will be at best in a long U-shaped recovery, which in some cases – the eurozone and Japan – may be long enough to stretch into an L-shaped near-depression. Avoiding double dip recession will be difficult.

In such a world, recovery in the stronger emerging markets – the great hope for the global economy – will suffer, because no country is an island economically. Indeed, growth in many emerging-market economies – starting with China – is highly dependent on retrenching advanced economies."

Roubini concludes with a warning: "Fasten your seat belts for a very bumpy ride".

Saturday, July 17, 2010

The two-year Treasury note yield dropped for the 7th straight week, falling 0.04%, which may seem low, but it's 6.34% of what it was. The new yield is 0.59% and is just 0.0135% from the lowest level ever of 0.5765%.

The 10-year note yield also fell 0.14%, to 2.92%, from 3.06% on July 9. Accordingly, TLT, the popular 10y Treasury ETF, is trading at $100.80.

The yields are dropping because investors are fleeing to safety, which is the US treasury notes (the wisdom of that is a different story). This fact has been reported by pretty much all financial media and entertainment TV. This raises the possibility that weaker hands are simply being shaken off the market. A few more drops like this and all weak investors will sell, paving the way for another massive rally, and massive profits by the big fish.

It is becoming quite apparent that quantitative easing II is coming, and with it, massive currency fluctuations (as in US dollar drop), eventually causing stocks and commodities to go up.

Friday, July 16, 2010

Speaking of INO, they just issued a new analysis on the Euro, using the EUO ETF. This is interesting because the EUO is an ultra short, meaning, it correlates positively with the US Dollar. Watch video or run the tool's free trial.

Good news for options users: Options chains are now available through Google Finance. The link appears on the left side. This will open a whole new set of possibilities for programmatic access and new tools.

Gold bugs will be having heart attacks soon. Buried in the Health Care bill:

"starting on January 1st in 2012, U.S. federal law will require coin and bullion dealers to report to the Internal Revenue Service all gold and silver coin purchases and sales greater than $600". (Daily Pfennig, July 16)

At least this time there's nothing about wooden arrows in the sausage, or maybe there is!

Tuesday, July 13, 2010

The Wall Street Jornal reported today on the rumours of a RIM's BlackBerry tablet that will fight to Apple's iPad head on.

Ashok Kumar, an analyst and managing director at Rodman & Renshaw that RIM's new tablet will have a 7-inch screen and will offer front and rear facing cameras, just like to those found on Apple's antenna-flawed iPhone 4.

Mr. Kumar says that "Research In Motion is trying to pull forward the launch of the 7-inch touchscreen tablet from early next year to year end...with a marginal point of differentiation being the front- and back-facing cameras for videoconferencing,".

The BlackBerry tablet will be powered by a 1GHz processor which offers full HD 1080p playback, 16-megapixel image captures and advanced 3D graphics.

As this is an election year in the U.S. and things are not looking rosy at all, it is quite possible that we will see another round of quantitative easing. This still affect the U.S. dollar. We have seen recently how the Euro has recovered from its spring lows. The U.S. cannot afford to have strong dollar as it severely affects if exports. Mr. Geithner has been pushing for the Europeans to keep printing money (stimulus) as that would create a market for the U.S. to sell to, but Europeans do not seem inclined to.

It is an interesting tug of war, one that will significantly affect those commodities tied to the U.S. dollar, namely gold and oil. Will they go up, as expected, or will the USD recover and will they sink?

Below are straddles for the Fall gold via the GLD ETF, for oil, via the UCO ETF , and for the USD, via the UUP ETF. Oil also shown for July as it is at an attractive price (click on each ETF link to receive buy/sell alerts).

Dagong International Credit Rating had downgraded the debt levels of the US and Britain, bringing them lower than China. China of course has about $3T in reserves.

Dagong a company that normally rates bonds, has now issued ratings of the creditworthiness of nations. Some dismiss this company's ratings as Chinese politics. However, as the debt of the U.S. keeps growing and growing with no end in sight, many realize that they do have a point here.

A couple of months ago Europe announced that it did not like te recent downgrades by Fitch, Moody’s and Standard & Poor's and announced they wanted to create their own rating agency (in addition to their own version of the silly bank stress tests).

Dagong also gives growth rates more weight than Fitch, Moody’s and Standard & Poor’s. Brazil, gets an A- 'stable' rating, while the U.S. get s aBBB-.

China gets an upgrade to AA+ - alongside Germany. Dagong saves its own AAA rating for the likes of commodity-rich Australia, Norway and New Zealand.

Dagong seeks to break the monopoly of the big three US agencies, the ones that failed miserably during the crisis of 2007 andf 2008, and amazingly are still in business.

Dagong says that the current western rating system "provides the wrong credit-rating information and fails to reflect changing conditions".

Now it was Fitch Ratings, followed by Moody, who downgraded Portugal's long-term foreign and local currency issuer default ratings to AA- from AA. "The outlooks on the long-term IDRs are negative", says Fitch.

Monday, July 12, 2010

BP has recovered quite a bit of ground recently due to all the news about a new oil cap being installed. The new cap, if successful, will allow BP to recover about 80,000 bpd. This in spite of the fact that the company claimed that only a few thousand bpd were leaking. There are news as well of impending takeover of BP.

In spite of all the lies and the incredibly disaster in the gulf, below are straddles for BP, for both July and August, computed with StraddlesCalc Tool. Since July only has another 4 option days, they are extremely risky.

As readers know, these straddles have been very profitable.

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

The ECB has just announced that it bought only about 1B euros worth of bonds last week.

"The slowdown comes after spending 4 billion euros ($6 billion) for three weeks running and adds further weight to some economists' views that the ECB will keep the buying to a minimum.ECB President Jean-Claude Trichet pointed to slowdown as a possible trend last week, while ECB heavyweight Juergen Stark said on Friday that the programme could be brought to a close if bond markets continued to improve."My hunch is that if there is a sense that the market is returning to some kind of normality then they could remove the support and see how the market reacts," said Deutsche Bank economist Gilles Moec". (Reuters)

The ECB had started buying bonds in May 2010 as a response to the Greek debt crisis which was threatening to lock higher-debt euro zone members out of borrowing markets.

"Considering buying government bonds was so contentious within the Governing Council I wouldn't be surprised if they tried to stop as soon as possible, although they would have to leave the door open to return to it."

As a result, the euro rose roughly two ticks against the dollar after the purchased amount was announced. German bond yields, which move inversely to prices, were lower across the curve by 1600 GMT with the two-year Schatz yield falling the most.

Consumers Reports has just announced it does not recommend the iPhone 4 dues to its infamous Antenna problems, which it verified in spite of the all the denials from APPL and is outrageous claims of "illusions".

AAPL's stock trades at $257. Below are straddles for August, which allow an investor to profit if the stock goes up or down (Click on link to receive real-time buy/sell alerts on AAPL). This is not what we expected from a company like AAPL.

"It's official. Consumer Reports' engineers have just completed testing the iPhone 4, and have confirmed that there is a problem with its reception. When your finger or hand touches a spot on the phone's lower left side—an easy thing, especially for lefties—the signal can significantly degrade enough to cause you to lose your connection altogether if you're in an area with a weak signal. Due to this problem, we can't recommend the iPhone 4."

"We reached this conclusion after testing all three of our iPhone 4s (purchased at three separate retailers in the New York area) in the controlled environment of CU's radio frequency (RF) isolation chamber. In this room, which is impervious to outside radio signals, our test engineers connected the phones to our base-station emulator, a device that simulates carrier cell towers (see video: IPhone 4 Design Defect Confirmed)".

"Our findings call into question the recent claim by Apple that the iPhone 4's signal-strength issues were largely an optical illusion caused by faulty software that "mistakenly displays 2 more bars than it should for a given signal strength."

Even Ben S. Bernanke says small businesses are having a hard time getting loans. These are the loans "they need to expand or stay afloat and keep the U.S. economic recovery going".

Bernanke is increasing pressure on banks to expand credit in order to boost growth and employment after banks’ loans to small businesses fell from $710B to $670B from in the past two years. He says that ccreditworthy businesses with strong cash flows and a decline in collateral values are have trouble getting loans.

“Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges,” “Our message is clear: Consistent with maintaining appropriately prudent standards, lenders should do all they can to meet the needs of creditworthy borrowers.”

“The formation and growth of small businesses depends critically on access to credit,” “Unfortunately, those businesses report that credit conditions remain very difficult.”

According to Bloomberg and Fed data, in June U.S. commercial and industrial loans held by banks have declined to $1.24T from $1.6 trillion at the end of 2008.

Bernanke added: “If you thought housing had declined in value, take a look at what equipment is worth.”

"Many proprietors have had to borrow on their personal credit cards or from retirement accounts".

Agencia Estado in Brazil reports that President Luiz Inacio Lula Da Silva will sign a decree allowing the 12 cities that will host 2014 World Cup matches into debt beyond the limits authorized by the Fiscal Responsibility Law.

The law restricts municipalities' spending to 60% of the collection. The decree will allow them debt equivalent to twice of what they collects.

With late bids and many works not yet started, the change in the law will facilitate public spending and allow for less bureaucratic approval. The federal government will declare a period of four years except the Fiscal Responsibility Law, and allow the debt to the works aiming at the World Cup are held. It is estimated that contracts worth a total of $50B will be the subject of bids in the next four years due to the World Cup.

There are already constitutional questions as to whether the President can sign such decree.

Zero taxes

In addition to increased borrowing capacity, the states and the federal government will not collect a penny in taxes from FIFA. This is a requirement by FIFA, a hugely profitable entity, for allowing the World Cup.

Rio

Rio has already begun to celebrate the World Cup. Yesterday, a huge banner was unfurled at the city's symbol, the statue of Christ the Redeemer. At the feet of the 38 meter statue the banner read, "Welcome to Brazil 2014 World Cup."

Friday, July 9, 2010

Brazil's next President, to be elected in November, will inherit a country "bursting with fruit", and one that will host the next soccer World Cup in 2014, and the 2016 Summer Olympics. Brazil also has huge new activity exploiting hugely vast reserves of oil off its shoreline close to Rio and Sao Paulo states.

The Independent in the U.K had a lengthy article on Brazil today. It says you cannot spend a day in Brazil without sensing the economic miracles happening there:

Q1 growth touched 9%

Helicopter pads atop the skyscrapers of Sao Paulo buzzing with air traffic - again

Lula recently named the world's most influential leader, raising the country's profile on the world stage and lifting much of the population out of poverty.

Not all roses

Not everything in Brazil is beautiful: "Not the slums, or favelas, which ring cities like this one or Rio de Janeiro, or last Saturday's national glee when Argentina – neighbour and perennial rival – crashed out of the World Cup one day after the Brazilian squad's humiliating Dutch demise".

Oil and GDP Growth

"Rather than giving them pause, the crisis afflicting the deep-sea drilling industry in the Gulf of Mexico is if anything spurring Brazil to move more quickly to increase production. Oil revenues now stand at 12 per cent of the national GDP and may rise to as much as 20 per cent.

It is a country that has moved far beyond the clichés of its international brand – the contours of its tanned beach-goers and catwalk models. Brasilia is agonising about keeping control of its economic boom while the rest of us are squabbling about the respective benefits of deficit-slashing austerity versus stimulus spending. (President Lula apparently thought that debate sufficiently boring that he did not show up to the recent G20 summit in Canada citing flooding in north-eastern Brazil.) The chatter, at this party and elsewhere, risks running away with itself. "They get a little bit carried away," a correspondent for a foreign news agency whispers, citing Brazilian diplomats telling him that China is investing in Brazil so feverishly because it sees it overtaking the United States soon as its most important export market. Come now.

Look hard enough and you will find sensible people in Brazil willing to identify those things that are not going so well, like the failure to invest in infrastructure (Sao Paulo's international airport is grittier than a Greyhound bus stop), Brazil's inability to upgrade school-age education and the still utterly byzantine ways of its bureaucracy and taxation system. Steve Jobs recently rejected a plea from the city government in Rio de Janeiro to open an Apple shop there. He shot back that the "super-crazy" tax system in Brazil "makes it very unattractive to invest in the country" and that "many high-tech companies feel that way". In all the pro-Brazil hoopla, this rude rebuff by Jobs registered with no one except a few attentive bloggers.

That Brazil is on the move, threatening to leave its similarly aspiring neighbours like Argentina and Mexico in the dust, is no longer in dispute, however. China has been in the know for years, but that is because it long ago turned to Brazil for so many of its desperately needed raw materials – everything from soy to iron ore to lumber. Now others are starting to pay attention. If Brazil, the B in the so-called BRIC group of fast-emerging nations (the others are Russia, India and China), is indeed on a path towards eventually joining the ranks of the developed nations, no one wants to be caught by surprise.

Thus the awful international airport in Sao Paulo is fit to burst only in part because Brazilians are discovering that having a relentless rising currency – the real – is a marvellous thing when travelling abroad. Adding to the traffic are the foreign businessmen and investors galloping into town, chequebooks at the ready, to find out what is going on and how they can share in the suddenly exploding pie.

Telling also are the beginnings of a reverse of the trend where young, privileged Brazilians assumed they would go abroad for university and quite likely their careers. It's the route that Julio Vasconcellos, now 29, followed. But having been in the US for 10 years, most recently in Silicon Valley in California, he talked to a friend over the New Year about a possible internet start-up in Brazil. They dreamed up peixeurbano.com – urban fish – where consumers learn about retail bargains. On a Wednesday in March, he tells me, he arrived in Rio de Janeiro – more specifically in the hip Botafogo district – and by the Thursday the site was up. He employs 40 people and is interviewing for 30 more positions.

"I just felt it was the right time to come back," he said. "You are starting to see people who are more open-minded and with a more international focus looking at Brazil as an opportunity and making bets on it in the same way people in the 1990s made bets on China." The horizon in internet development may be particularly wide and rich. "Every day I have a meeting with a different partner and five different ideas come to my head that would be huge business in Brazil that nobody is doing anything about. You can't do that in Silicon Valley."

While Brazil remains, according to the World Bank, one the worst countries for the gap between the rich and poor, the income divide has begun to close in the nearly eight years of President Lula. True the favelas, running with sewage, guns and drugs, remain a feature of the urban landscape, especially in Rio de Janeiro where more than just cosmetic surgery will be required before the 2016 Games. But the number living in poverty has fallen during his two terms from about 50 million to 30 million. Studies meanwhile point to slightly more than half of all Brazilians now belonging to a socio-economic group broadly described as lower middle class. They will not visit Gucci in Mr Jereissati's malls, but they will go to the less flashy retailers like C&A or Topshop when it makes its debut in Brazil next year.

Brazil has been lucky, both finding its reserves of oil and in its partnership with China, which has helped considerably to drag it into greater prosperity. (Were China to trip, Brazil may fall hard.) President Lula also inherited an economy that, after the catastrophe of hyper-inflation in the early 1990s, had already been transformed by the policies of his predecessor, Fernando Henrique Cardoso. But, even his detractors agree that despite his past as a leftist union organiser, he has shown an unexpectedly steady hand guiding the economy and that his welfare policies have been crucial in ensuring that Brazil's rising tide has lifted most, if not all, boats.That is not to say Brazil is set for good. Some economists worry of bubble conditions forming and warn especially about gushing capital flows into the country and the ceaseless upward movement of the currency. It's not just that dinners in Sao Paulo now cost as much or more than in Manhattan. The supercharging of the real also threatens to stunt any move in Brazil away from a commodities economy to a manufacturing one because as an exporter it is becoming ever less competitive."

Standards and Poors has issued an eye-opening report about the state of the S&P500 companies in terms of cash and debt. While the financial media reports that companies are sitting on record levels of cash, the real question is how much debt they have and how do we fare today compared with historical levels, let's say the fairy tale levels of 2006 when everything was so good (we know now it was all fake).

S&P 500 companies have approximately $1T in cash. However, they also have approximately $2.7T in debt. So is that cash really cash, or... debt? Is that a good thing or a bad thing? Clearly it is not a good thing. One of the worst mistakes someone can make is acquire cash via debt. Normally debt accrues higher interest than cash.

Furthermore, from 2006 cash went up about $300B, debt went up about $600B.

Despite what some economists and bloggers say about the impending doom of Canadian economy and its 'about to crash' housing market, Canada added 93,200 new jobs in June, bringing the jobless rate to 7.9%. This is the first time it has been under 8% since January 2009.

As a result, the Canadian dollar rose over half a cent.

The Canadian economy has now recouped practically all the jobs that were lost during the economic crisis of 2008 and 2009.

The two most populous provinces did well. Ontario gained 60,300 workers and Quebec gained 30,400 new jobs.

According to Stats Canada, the new jobs were split between full-time and part-time, with more than half private sector. There was also a big increase in student employment.

Negatives

10,200 fewer were reported working in the goods producing industries.

Other provinces didn't do a well. While most registered slight gains, Newfoundland and New Brunswick suffered job losses.

Tuesday, July 6, 2010

"A year ago we had all these policy bullets," "We could push down rates to zero, we had (quantitative easing), we could do a budget deficit of 10 percent of GDP (or) backstop the financial system."

"Banks at this point are too big to fail, but also too big to be bailed, especially in Europe where the sovereigns are in trouble and therefore the ability to backstop the financial system is not there,"

"Everything signals a slowdown of the US, a slowdown of Europe, a slowdown of Japan and a slowdown of China,"

"everything becomes worse," "The unemployment rate goes higher, the budget deficit is larger, home prices don't stabilize, but fall further and trade tensions with China will be bigger"

"You don't need to have a double dip recession to have a situation that is dismal,"

Monday, July 5, 2010

When we thought we had heard it all, Bloomberg reports today that according to independent CreditSights Inc., Spanish savings banks could be hiding their losses on home loans by taking non-performing mortgages out of securitized transactions. By using creative accounting, it rurns out that by carrying bad loans on their own books the banks can avoid downgrades to their MBSs.

The CreditSights reports shows that while the savings banks give little information about the state of their loan books, investor reports on the performance of the securitized debt suggest asset quality is weaker than at commercial lenders.

“Caja-originated mortgages are performing much worse than those extended by Spain’s commercial banks,”. By buying mortgages out of the pools “they could have been artificially reducing the level of bad loans in RMBS while simultaneously undermining the quality of the cajas’ own assets,”.

"A comparison of loans originated by commercial banks and cajas shows that delinquencies in the savings banks’ mortgages have been higher than those of the commercial banks for at least four years, the report said. Falling incomes caused by government austerity packages “would no doubt precipitate further rises in delinquencies,” CreditSights said".

“By buying the loans out of the mortgage pool, the cajas would be taking those weaker loans onto their own books,” “The current 3.7 percent serious delinquency rate may flatter the performance of the cajas mortgage books and underestimate their potential losses.”

What a way to save a few bucks. Ryanair, who recently said it will charge 1 Pound every time a passengers uses the washrooms, announced it intends to offer standing room only on several rows at the back of its airplanes. Passengers would be strapped to special "seats":

Tickets to some places will be as low as 10 Pounds. Two washrooms would also be removed, presumably as passengers will no longer used them since they will be charged on a pay-per-use basis as well.

The new layouts will allow an extra 40 or 50 passengers per plane. Safety tests will be performed next year.

However, EASA (European Aviation safety agency) says its safety rules would need to be rewritten to allow such a scheme.

Sunday, July 4, 2010

Nouriel Roubini said today that government bonds of countries such as Canada, Germany, and the U.S. will be a haven from "increasingly volatile markets in coming months".

Speaking in France, Roubini added that “It is going to be a period of economic and financial fragility,” “The short-term and long-term debt of countries not yet subject to sovereign debt concern will be havens,”.

Furthermore, he added that the global economy will slow down in the second half as a result of deficit-cutting measures adopted byEurope (well, assuming they actually occur, because everyone nows what would happen if they actually go ahead).

“The next few weeks and months will be a time of volatility as the market surprises on the downside,” “It’s a pretty ugly picture. The macro news from the U.S., Europe, Japan and even China is disappointing. Credit spreads will widen.”

Saturday, July 3, 2010

Unemployment was reported this week as having dropped to 9.5%. This sounds good, except that there are lots of census workers in that figure and the "participation rate" declined significantly. While last month the number of unemployed was 15M, this month there were 14.6 million. Does anyone believe the economy added 400,000 jobs last month? Not in this planet. What a joke.

From Calculated Risk comes this great chart showing unemployment numbers - without the census workers: